Kandell v. Niv involved a derivative lawsuit brought by a stockholder of FXCM, Inc. (the “Company”), a foreign exchange broker that executed customer trades primarily for retail customers. In placing customer trades, the Company’s policy was to limit the customers’ risk to the amount of their original investment. According to the plaintiff, the Company’s stated policy was “generally not to pursue claims for negative equity against our customers.” When a customer’s investment appeared likely to go into a negative balance, the Company would try to close out the open position. But, according to the court, if “[the Company was] unable to close out a customer account before its losses exceed the amount the customer invested, [the Company], and not the customer, takes the loss.”

The Company was regulated by the Commodity Futures Trading Commission (the “CFTC”). The stockholder-plaintiff alleged that the Company’s policy of limiting its customers’ exposure violated 17 C.F.R. § 5.16 (“Regulation 5.16”), enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Regulation 5.16 states that

“[n]o retail foreign exchange dealer, futures commission merchant or introducing broker may in any way represent that it will, with respect to any retail foreign exchange transaction in any account carried … on behalf of any person … limit the loss of such person.”

Prior to the litigation, a “flash crash” occurred that prevented the Company from closing out many of its trades, thus leading to significant losses. Also, while the stockholder lawsuit was pending, the CFTC brought an enforcement action against the Company alleging violations of Regulation 5.16. The Company later entered into a consent order in which it paid a $650,000 fine without admitting or denying the allegations.

Haas then summarizes the holding:

The issue before the court was whether it would have been futile for the stockholder to make a derivative demand on the board. Demand is futile if a board cannot exercise an independent business judgment in considering whether to bring the claims. ...

The court concluded that, because “a fiduciary of a Delaware corporation cannot be loyal [to the company] by knowingly causing it to seek profits by violating the law,” the directors faced personal liability sufficient to excuse the derivative demand and allow the stockholder lawsuit to proceed.

... demand was excused with respect to the claim that defendants knowingly caused or permitted FXCM to violate the law. Because the plaintiff did not contend that a majority of the board was interested or lacked independence, the relevant question was whether the defendants faced a substantial likelihood of liability from the claims. As a result of the exculpatory provision in FXCM’s charter, the directors would face liability only if they knowingly caused or permitted FXCM to violate the law. In that regard, the Court concluded that the relevant CFTC regulation “clearly prohibits touting loss limitations to clients,” that FXCM had an established policy of doing precisely that, and that there was a strong inference that the directors knew that FXCM’s policy violated the regulation. The Court concluded that demand was excused under the “highly unusual” facts alleged in the complaint because the directors faced a substantial threat of liability that rendered them incapable of disinterestedly evaluating a demand.

As VC Glasscock explained, the unusual facts were these: "a Delaware corporation with a business model allegedly reliant on a clear violation of a federal regulation; a situation of which I can reasonably infer the Board was aware." Presumably, VC Glassock thinks the more usual case would be one in which a Caremark claim is brought where the board allegedly failed to exercise adequate oversight and supervision of managers who caused the company to break the law in isolated cases as opposed to doing so routinely as part of their business model.

VC Glasscock's statement of the law is doubtless correct:

Where directors intentionally cause their corporation to violate positive law, they act in bad faith; this state does not “charter lawbreakers.” While a Delaware corporation may “pursue diverse means to make a profit,” it remains “subject to a critical statutory floor, which is the requirement that Delaware corporations only pursue ‘lawful business’ by ‘lawful acts.’” “As a result, a fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profits by violating the law.”

Similarly, knowing failure to prevent such a violation implies bad faith. “Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.”

Long time readers, however, will recall the numerous occasions on which I have argued that-as a matter of policy--this is exactly the wrong result. Instead of being analyzed under the bad faith/duty of loyalty issue (and don't get me started on the absurdity of pulling bad faith into loyalty to begin with), the issue of corporate criminality should be analyzed under the duty of care (and, as a result, the corollary business judgment rule).

In a leading Third Circuit case arising under New York law, for example, the court treated the problem as involving an alleged “a breach of the defendant directors' duty to exercise diligence in handling the affairs of the corporation.”[5] The ALI Principles likewise treat the issue as one involving “a duty of care action.”[6]

The business judgment rule will not insulate from judicial review decisions tainted by fraud or illegality.[7] The key issue in this context is whether the board has a duty to act lawfully. In the oft-cited Miller v. American Telephone & Telegraph Co. decision,[8] the Third Circuit held that directors have such a duty. AT & T failed to collect a debt owed it by the Democratic National Committee for telecommunications services provided during the 1968 Democrat Party’s convention. Several AT & T shareholders brought a derivative suit against AT & T’s directors, alleging that the failure to collect the debt violated both federal telecommunications and campaign finance laws. Ordinarily, a board decision not to collect a debt would be protected by the business judgment rule. Citing a 1909 New York precedent,[9] however, the Third Circuit held that the business judgment rule did not insulate defendant directors from liability for illegal acts “even though committed to benefit the corporation.”[10]

Assuming a duty to act lawfully exists, operationalizing it is a nontrivial task. Should there be a de minimis exception?[11] If a package delivery firm told its drivers to illegally double-park, so as to speed up the delivery process, for example, it is hardly clear that liability should follow. Should the business judgment rule be set aside only where the board ordered violations of criminal statutes or should it also be set aside where the board authorized violation of some civil regulation? The criminal law long has distinguished between crimes that are malum in se and those that are merely malum prohibitum. The latter are acts that are criminal merely because they are prohibited by statute, not because they violate natural law. It is said that “misdemeanors such as jaywalking and running a stoplight are mala prohibita, as are most securities-lawviolations.”[12] Individuals routinely make cost-benefit analyses before deciding to comply with some malum prohibitum law, such as when deciding to violate the speed limit. Is it self-evident that directors of a corporation should be barred from engaging in similar cost-benefit analyses?[13]

And, yet, still more questions must be answered if a duty to act lawfully is to be imposed. If neither the corporation nor the board was convicted or even indicted, for example, should plaintiff have to make out the elements of the criminal charge?[14] If so, to what extent does the criminal law concept of reasonable doubt come into play? Is a knowing violation of criminal law a per se violation of the duty of care unprotected by the business judgment rule?[15] How are damages to be measured and is causation an issue?[16] And so on.

The point is not that corporations should be allowed to break the law. They should not. If a corporation breaks the law, criminal sanctions should follow for the entity and/or the responsible individuals. The point is only that fiduciary obligation and the duty to act lawfully make a bad fit. If the question is one of reconciling authority and accountability, it is not self-evident that corporate law should hold directors accountable simply for deciding that the corporation’s interests are served by violating a particular statute. After all, “[a] business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.”[17]

Put another way, the point of the business judgment rule is that shareholders should not be allowed to recover monetary damages simply because the directors made the wrong decision. Allowing shareholders to sue over a decision made with the intent of maximizing corporate profits is nothing less than double dipping, even if the decision proves misguided. This claim is further supported by the realities of shareholder litigation. Shareholder lawsuits alleging that directors violated the purported duty to act lawfully will be brought as derivative actions. The real party in interest in derivative litigation is the plaintiff’s attorney, not the nominal shareholder-plaintiff. In most cases, the bulk of any monetary benefits go to the plaintiffs’ lawyers rather than the corporation or its shareholders. In practice, such litigation is more likely to be a mere wealth transfer from corporations and their managers to the plaintiff bar than a significant deterrent to corporate criminality. Accordingly, the illegality of a board decision—standing alone—should not result in automatic director liability. Indeed, one could make the case that illegality should not constitute a basis—again, standing alone—for rebutting the business judgment rule. At the very least, however, courts should carefully consider whether the decision to cause an illegal act was in fact so grossly negligent as to violate the director’s duty of care.

In the November 2017 issue, Cook's Illustrated ranked multi-cookers. it's top finisher was the Fagor Lux LCD Multicooker. In second place was the slightly older and less expensive Fagor Lux Multicooker, of which they wrote:

We still liked our old winner; it made great pressure-cooked food. And though, like other models, it tended to cook less efficiently than a traditional slow cooker because of its shape, we were able to tweak our recipes to get good food. It had a comparatively simple and navigable interface and we really liked the clear “locked” and “unlocked” symbols, which made it easier to attach the lid. It has a lot of buttons and its interface isn’t quite as streamlined as our new winner, but it’s still a good option.

I love mine so much I also bought a 4 quart model. And, yes, I frequently use both of them while cooking the same meal. It's my favorite kitchen gadget of 2017 and my highest recommended Christmas gift for your favorite cook. By the way, Cook's Illustrated is the only food magazine with subscribing to. The magazine, its website, and cookbooks are my cooking bible.

I got to thinking about the titular topic when I read John Allen's commentary on the recent fracas over Pope Francis' musings about the translation of the Lord's Prayer:

In a nutshell, Francis commented on the line “lead us not into temptation” in the English version of the prayer, saying he doesn’t care for it. Here’s a sampling of the headlines we saw from major secular news outlets:

“Pope Francis calls for Lord’s Prayer to be changed” (The Independent)

Anyone who knows the score would look at those headlines and let loose a sigh of despair. (What they do next is a sort of personality test - most of us would just shrug and move on, but a cranky few would start firing off snarky tweets.)

The problem, of course, is that each of those headlines is fundamentally inaccurate. This pope, and almost certainly no pope ever, would propose changing a prayer that comes from Jesus himself and is at the very core of the Christian faith.

What Francis was talking about instead is a change to the translation of the Lord’s Prayer in English, based upon the phrasing in certain other languages. (As hard as it may be for some Americans to believe, the Our Father was not originally pronounced in English. Jesus likely spoke it in Aramaic, the Semitic language of the Palestine of his day, and it was recorded in the New Testament in koine Greek, meaning the popular Greek of that time.)

Further, Francis wasn’t “proposing” anything either, in the sense of an already formulated and worked-out idea being laid before some decision-making body with the authority to make such a decision.

It probably would be more accurate to say that Pope Francis was thinking out loud, reflecting on the way the Our Father is translated. His beef was that the English version of “lead us not into temptation” could be understood to mean that God causes people to sin, or at least induces us into it.

This is not the first time Pope Francis has caused an uproar with off-the-cuff remarks. To the contrary, it seems to be something of a habit of this Pontifex.

Of course, Pope Francis is not the only world leader who seems to lack a filer between brain and mouth.

We routinely see the same sort of thing when Donald Trump sends one of his off-the-cuff tweets out into the world, for example, wrecking havoc as the percolate though the media and social media.

When I spout off the worst thing that happens is that the Daily Bruin and UCLA's intolerant left have yet another cow.

When people with the authority and prominence of a Pope or a President spout off, however, things can get much more serious. Wars could start. Schisms could break out.

So we'd all be a lot better off if Pope Francis and President Trump had minders who could intercept off-the-cuff thinking before it goes viral.

12/12/2017

BlackRock Inc. and Vanguard Group are the clearest examples of passive investing giants’ shift toward more active oversight of the companies they own, according to a first-of-its-kind study by investment researcher Morningstar Inc.

These two firms showed the most growth since 2014 in the total times that they've met with companies to voice their concerns on issues ranging from executive pay to climate change.

I'm a long-term Vanguard investor, precisely because I strongly believe in the virtues of passive management. But passive ought to mean passive. I don't want Vanguard using the fees it charges me to engage in shareholder activism, especially when it comes to highly contested CSR issues like climate and diversity.

Vanguard needs to remember that not everybody who invests with it is a millennial social justice warrior.

12/10/2017

Although my birthday (59 if you're keeping score at home) isn't until Monday (so there's still a few hours for shopping), we had my birthday dinner last night. The centerpiece was my birthday present to myself--an Italian white truffle.

Lamb

One rack of lamb, frenched.

sale

pepper

Score the fat layer over the meat. Season the rack heavily with salt and pepper, rubbing them into the fat and meat.

Let the rack come up to room temperature while you preheat the oven to 450°. Put a cast iron pan in the oven to heat. When the oven is fully heated put the rack in the pan fat-side down. After 5 minutes, flip the rack so the fat side is facing up. At the 10 minute mark, reduce the oven temperature to 325°. After 10 more minutes (for a total of 20) take the lamb out of the oven and check the internal temperature with an instant read thermometer. If it's below 125°, put the rack back in the oven for a couple of minutes. If it's the right temperature, put it on a cutting board to rest.

Sauce

1 teaspoon unsalted butter

1 tablespoon shallots

¼ tawny port

¼ white wine

¼ low sodium chicken stock

green peppercorns (I like a lot but suit your own taste)

pinch salt

teaspoon Dijon mustard

Put butter in a small sauce pan over medium heat. When it stops foaming, add shallots and cook for a couple of minutes until they are translucent. Add port, wine, chicken stock, peppercorns, and salt. Turn heat to high and bring to a boil. Reduce heat to a low simmer. Reduce liquids to a couple of tablespoons. Take pan off the heat. Add mustard and stir to combine.

Cut the rack of lamb into 4 2-bone pieces and top each with a spoonful of sauce.

Short cut risotto with white truffles

I love risotto but I hate slaving over a pot stirring while adding dribs of stock. Hence, short cuts.

Combine all your ingredients in your 4-quart Fagor LUX Multi-Cooker (you have bought one haven't you?). Using the browning feature bring mix to a boil. Install lid (making sure pressure valve is closed) and select the risotto function on the multi-cooker. When the risotto is done, unplug the multi-cooker and let rice rest for a few minutes before releasing pressure.

This is a gorgeous wine. Deep ruby despite having thrown a lot of sediment. Big bouquet of blackberries, blackcurrants, leather, tobacco, and cedar. Smooth tannins and good acidity make it very food friendly. Fully mature but may hold a while. Grade: 97

12/08/2017

“In light of evolving investor sentiment, we have clarified that we consider that the board generally has an imperative to respond to shareholder dissent from a proposal at an annual meeting of more than 20% of votes cast — particularly in the case of a compensation or director election proposal.”

“Moreover, we believe that a supermajority vote requirement can enable a small group of shareholders to overrule the will of the majority shareholders. We believe that a simple majority is appropriate to approve all matters presented to shareholders.

On the one hand, Glass Lewis claims that a small group of shareholders (as few as 20%) commands an “imperative” while on the other, Glass Lewis declaims that a small group must not overrule the will of the majority. I’m not the first to observe this foolish inconsistency. See this blog post by Bob Lamm.

Both public universities and private universities that aspire to serious and cosmopolitan intellectual life should be treating students of minority religions equally. But it doesn’t follow that they should commemorate the same way holidays that are an important part of the traditions of 90 percent of the students (both the Christians and the nonreligious who still grew up celebrating Christmas) as holidays that are important to 2 percent. ...

Loyola keeping a Catholic identity helps promote real intellectual diversity in American public life (and, again, I’d say the same as to other religious universities; I can imagine some religious belief systems that are so pernicious that, while they must be constitutionally protected, we can still say they hurt American life more than they help it, but I think that most of the traditions that found universities do have a good deal to contribute).

My own take is that if you're not Catholic don't go to a Catholic university unless you're willing to at least tolerate it's Catholic identity. Sadly, a lot of Catholic universities have chosen to embrace secular modernity and religious minorities by abandoning their Catholic identity. (Yes, Georgetown and Notre Dame, I'm looking at you--albeit from a distance).

Francis Pileggi blogged about an interesting recent conference in which members of the Delaware bar and bench discussed "the topic of contractual definitions, or limitations, on fiduciary duties in LLCs and LPs." The post makes a number of interesting points, including a reaffirmation of what I have long understood to be the gist of Delaware law in this area:

Delaware Supreme Court decisions have upheld basic principles of contract interpretation, especially in the context of waivers of fiduciary duty, including the following: (1) Waivers need to be clear in order to be enforceable; (2) The implied covenant is not a panacea for inartful drafting of every stripe. See, e.g., Brinckerhoff decision highlighted on these pages.

I'm also intrigued by this observation:

There was a robust discussion about alternative entity agreements with provisions that provide as follows: “One is not liable if:” and then several categories of conduct are described as not resulting in liability. One judicial officer present at the seminar said that those clauses should be interpreted to mean that one is liable unless the conduct fits within the enumerated described categories that follow the phrase “… not liable if:” …”

I assume that the issue is the application of the canon of construction (applied to both statutes and contracts), expressio unius est exclusio alterius; i.e.,

The Board relies on the “interpretive canon, expressio unius est exclusio alterius, ‘expressing one item of [an] associated group or series excludes another left unmentioned.’ ” .... If a sign at the entrance to a zoo says “come see the elephant, lion, hippo, and giraffe,” and a temporary sign is added saying “the giraffe is sick,” you would reasonably assume that the others are in good health.

12/05/2017

ANGLO-SAXON capitalism has had a bad decade. It is accused of stoking inequality and financial instability. A relentless pursuit of shareholder value has led big firms to act in ways that often seem to make the world a worse place. Aeroplane seats get smaller, energy firms pollute the air, multinationals outsource jobs and Silicon Valley firms avoid tax. Some people think that governments should exert more control over private enterprise. But what if the answer to a deficit of corporate legitimacy was to give shareholders even more—not less—power?

That is the intriguing possibility raised by a new paper by Oliver Hart of Harvard University and Luigi Zingales of the University of Chicago. Their argument has two parts. First, the concept of shareholder capitalism should be expanded, so that firms seek to maximise shareholders’ welfare, not just their wealth. Second, technology might allow firms to make a deeper effort to discover what their true owners want. Over 100m Americans invest in the stockmarket, either directly or through funds. It is their money at stake, but their views and values are often ignored. ...

The authors envision shareholders guiding the broad direction of company strategy. They do not elaborate on the details, but imagine 100m Americans pressing a “shareholder democracy” app on their phones. Grannies from Grand Rapids and cowboys from Colorado might vote for Delta Air Lines to provide more legroom, Exxon to assume a higher carbon price when it drills for oil, IBM to move some jobs from Delhi to Detroit and Apple to pay a higher tax rate than its current 18%.

My mentor Michael Dooley once observed of employee participation in corporate democracy that workers will be indifferent to most corporate decisions that do not bear directly on working conditions and benefits: “As to the majority of managerial policies concerning, for example, dividend and investment policies, product development, and the like, the typical employee has a much interest and as much to offer as the typical purchaser of light bulbs.” Michael P. Dooley, European Proposals for Worker Information and Codetermination: An American Comment, in Harmonization of the Laws in the European Communities: products Liability, Conflict of Laws, and Corporation Law 126, 129 (Peter E. Herzog ed. 1983). The same is obviously true of so-called ordinary shareholders. The idea that such shareholders know better than management how wide Delta's seats should be is patently absurd.

There's no reason to think that even supposedly sophisticated investors such as hedge funds would be better at making operational; or strategic decisions for corporations, as I explained in Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013). Available at SSRN: https://ssrn.com/abstract=2298415:

As Professor Lawrence Mitchell (2009) asks:

Do we really want speculators telling corporate boards how to manage their businesses? Those who say “yes” want to increase short-term management pressure and thus share prices, regardless of the corporate mutilation this induces. They do not seem to care that their profits come at the expense of future generations’ economic well-being. But if our goal is to give expert managers the time necessary to create long-term, sustainable, and innovative businesses, the answer is a clear “no.”

Mitchell’s argument is supported by empirical studies finding that it is difficult to establish a causal relationship between improved firm performance, if any, and business strategy changes effected at companies targeted by shareholder activists. (Gillian & Starks 2007, 69)

Mitchell’s argument also finds support in Brian Cheffin’s finding that, except for “a few hedge funds,” institutional shareholders “were largely mute as share prices fell.” (Cheffins 2009, 3) Even in the U.K., where shareholders already possess more governance powers than do shareholders of U.S. firms, big institutional investors simply stood by as the crisis unfolded. (Cheffins 2010) Strikingly, however, directors of troubled firms commonly played an active role in responding to the crisis, as evidenced by their orchestration of CEO turnover at a rate far exceeding the norm in public companies. (Cheffins 2009, 39-40)

The problem with plebiscitary shareholder democracy becomes even more obvious when the decision tree becomes more complex than a mere binary choice. Consider the idea that shareholder might vote on whether Exxon should "assume a higher carbon price when it drills for oil." That initial decision requires a host of subsidiary decisions, ratcheting up the complexity of the problem. For example, should carbon emissions resulting from traditional drilling be treated differently than those resulting from fracking? Should carbon resulting from natural gas drilling be treated differently than that resulting from drilling for oil? How much higher should the assumed assumed price be set?

The Economist acknowledges some of these concerns, but just sweeps them under the table. That dog won't hunt.

12/04/2017

Milk Street is Christopher Kimball's new project. Having left his old outfit, America's Test Kitchen, which long has been my go to source for cooking ideas, taste tests, equipment reviews, etc..., Kimball is now launched on a project of bringing global fusion food to the home kitchen.

"Bound to cause his fans to rejoice... even though its production values may be in the coffee-table league--a full-color image appears opposite every recipe--this book is designed for hard, occasionally sloppy, countertop duty. Recipes and accompanying photographs are contained on a single two-page spread, meaning that there isno frustrating flipping back and forth... The book fulfills its promise of sourcing the world's cuisines in search of flavor bombs that are made easy to produce in American kitchens."―The Wall Street Journal

"Overall gold... You already know and trust him from his years leading the way on America's Test Kitchen. Now, he's adding a different kind of spice to life... through his recipes and his research, he aims to connect us all."―Tasting Table

"This approachable book compiles an array of global recipes that are bold in flavor, yet simple enough for the home cook. Try the mouth-watering soups, such as Spicy Red Lentil Stew and Spanish Garlic. And be sure to pay attention to the technical tips along the way."―RealSimple

"All the recipes offer the reliability that Kimball is famous for, and there are lists of pantry staples and cooking tips included with some recipes to help readers get dinner on the table with ease...Egg dishes go from a simple scramble cooked in olive oil to curry braised eggs that promise to reinvent breakfast, and possibly dinner. Vegetable recipes are particularly interesting... [and] Kimball's fans will be pleased with this latest cookbook."―Publishers Weekly

On the weekend just passed, I made two recipes from Milk Street:

Gemelli Pasta with Chèvre, Arugula, and Walnuts. Despite substituting penne for the Gemelli pasta and spinach for the arugula, the dish was a triumph. Very straightforward with clear directions.

No sear beef and chickpea stew. I tweaked the recipe every so slightly so as to use my Fagor multicooker. Came out great with a broth that you could drink by the cupful.

In short, this is going to be very high in the rotation of the cookbooks I consult. Highly recommended.